LLC Guide
Small business owners appreciate limited liability companies (LLCs) for their strong liability protection, management flexibility, prestige, and tax options. Whether you’re a sole proprietor looking to take the next step, or an entrepreneur just starting out on your small business journey, we’re here to help you understand the ins and outs of LLCs so you can make informed choices about how you do business.
Looking for white-glove service to handle all the pesky filing for you? Registered Agents Inc can set up your LLC in just a few clicks for $100 + state fees, which includes a year of registered agent service.
What Is an LLC?
A Limited Liability Company (LLC) is a type of business entity formed at the state level that protects its owners from being held personally responsible for paying business debts. An LLC has its own distinct legal existence, separate from its owners. A corporate veil—a term used to illustrate this legal separation—protects owners’ personal assets. If an LLC can’t pay a debt, or is subject to a lawsuit, its owners aren’t usually required to dip into their personal assets to pay it. Without officially forming a business entity like an LLC, your business debts are your debts, and you’re personally responsible for paying them. This protection is called limited liability, and it’s the main perk of starting an LLC.
How to Start an LLC in Every State
Limited liability companies are formed at the state level, and every state differs just a little in their registration process. We have guides to creating an LLC in every state when you’re ready to dive into specifics:
In general though, starting an LLC takes at least these four steps:
1
Choose a registered agent.
Your registered agent is someone designated to receive legal notifications and service of process on behalf of your LLC. You’ll need their information—and in an increasing number of states, their signed consent to serve—before you can fill out your formation paperwork.
2
Name your LLC.
Each state has its own rules for what you can and can’t name an LLC, so be sure to check our guide for your state to get this step right. At minimum, plan for a name that isn’t being used by another business registered in the state, and avoid names that might be confused for government entities.
3
File Articles of Formation or Certificate of Formation.
The actual paperwork varies by state, as do the filing fees and methods.
When you hire us to form your business, we charge $100 plus state fees and include one free year of registered agent service. While the state is processing your documents, you’ll get access to your secure account where you can manage services and access our forms library. We even have operating agreement templates you can use to get a head start.
4
File your Beneficial Ownership Information (BOI) Report
The BOI report is a federal filing that discloses ownership information to the federal government as a countermeasure against financial crimes.
Note: A federal judge in Texas has temporarily blocked enforcement of The Corporate Transparency Act. Check our News Room for updates as this situation evolves.
Benefits of an LLC
The biggest benefit of an LLC is also its namesake: limited liability. While corporations also enjoy this benefit, limited liability companies have comparatively fewer regulatory requirements to operate. This translates into an easier time maintaining the so-called corporate veil that stands between your business assets and your personal assets. Keeping that veil intact means your individual liability stays limited, and your home, non-commercial vehicle, and personal savings accounts aren’t on the line should misfortune befall your business.
Other benefits of LLCs include:
Professional Prestige
LLCs convey a sense of professional credibility that can be difficult to establish as a sole proprietor. Having formally organized and registered your business with the state demonstrates a commitment to the future of your business that appeals to consumers and investors alike. They’re seen as more serious, so LLCs typically have an easier time finding external funding sources than sole proprietors with a fictitious business name.
Better Branding
One other major perk of registering your LLC is that every state requires its registered businesses to have unique names—the state must be able to distinguish between you and another business. Your brand is guaranteed to stand out in the crowd, making it easier to build brand identity and awareness and increase your market share. You can boost that branding with a custom domain and a professional website, and if you hope to go national someday, trademarking your business name can help your brand go the distance.
Ownership & Management Flexibility
LLCs are also popular among small business owners for their flexibility. Unlike corporations, which offer limited liability but are subject to a rigid structure, LLCs are open-ended in how they can be managed and owned. You can hire a manager to run your LLC or do it yourself. You can have multiple owners, often called members, or just one, and members can be individuals or business entities.
And while every state has default regulations and standards for how LLCs operate, members typically draft an operating agreement outlining the policies, procedures, and other operational requirements the LLC will follow. In fact, some states require operating agreements! So LLCs don’t need to hold regular board meetings, keep extensive records, or adhere to a mandated management structure—unless they choose to include those in their operating agreement.
Taxation Options
LLCs have choices when it comes to federal tax status. That’s because there’s no IRS tax designation especially for LLCs—they’re treated as pass-through entities by default. A single-member LLC is taxed as a disregarded entity (like a sole proprietor), and a multi-member LLC is taxed as a partnership. However, an LLC can file paperwork with the IRS to be taxed as an S-Corp or C-Corp if those tax statuses work better for the business.
Drawbacks of Limited Liability Companies
Every rose has its thorn, and for all the features and benefits of an LLC, there are a few considerations business owners will want to keep in mind:
- Cost to start and maintain.
Filing your paperwork to organize your LLC can come with steep costs. While some states have filing fees as low as $35, others can cost in the hundreds of dollars—in Tennessee, you’ll pay a minimum of $300 plus additional fees per starting member up to $3000. Additionally, most states have annual or biennial compliance filing requirements to keep your business in good standing, and a very few have annual franchise tax requirements. - Regulatory requirements.
Compared with sole proprietors, LLCs have more regulatory requirements that can make them complex to operate. For example, they’re required to maintain a registered agent to receive service of process and legal notices, and unless they qualify as an exempted category, LLCs are required to report Beneficial Ownership Information to FinCEN. - Perpetuity.
Unless an LLC’s written operating agreement says otherwise, an LLC may be at risk of dissolving if members join or leave the LLC. Specific statutes vary by state, but it’s a key weakness to be aware of so you can take steps to address it. Adding language to your operating agreement discussing transfer or sale of ownership can smooth this process.
How LLCs Pay Taxes
Limited liability companies have a lot of options for how they’re taxed. You’ll want to consult a tax attorney or other professional before committing to a specific federal tax status, but we’ll cover the basics of what you can expect from each tax election here.
Pass-Through Taxation
This is the default tax status for limited liability companies. Basically, the LLC’s profits and losses pass through to the owners, who report them on their personal tax returns. The LLC itself doesn’t have to file income taxes.
Self-Employment Taxes
The IRS considers each member (owner) of the LLC to be self-employed. Self-employed business owners have to pay self-employment taxes on all the LLC’s income—even the money that’s reinvested in the business. Self-employment taxes encompass both social security and Medicare, and sit at 15.3%.
S-Corp Tax Election for LLCs
LLCs can also file paperwork to be taxed as an S-Corporation. An S-Corp is not a business entity or structure. It’s a tax classification available to eligible businesses that combines some features of C-Corporation and pass-through taxation.
Pass-through taxation: Like partnerships, S-Corps don’t pay a federal corporate income tax—profits pass through to owners, who report income on their personal tax returns.
Distributions: Unlike partnerships, S-Corps can pay dividends to owners that aren’t subject self-employment taxes (as long as the owners are paying a reasonable wage to anyone working for the business).
C-Corp Tax Election for LLCs
The C-Corporation tax election is less common among LLCs, but not unheard of. C-Corps pay the corporate income tax rate on profits, and shareholders pay additional taxes for any profits they receive on their personal tax return. This is the infamous corporate “double tax,” and an LLC’s ability to elect a status without this double tax makes them appealing to many small business owners.
However, C-Corp taxation does have its benefits. Unlike in a default LLC or S-Corp, any profits that the C-Corp reinvests into the business aren’t subject to personal income taxes. C-Corps also have access to more tax deductions than other tax classifications, which may help members reduce their overall tax burden.
Operating Your LLC
One hallmark of a limited liability company is its operating agreement—the contract that defines how an LLC will be owned, managed, and run. Owners, called members, can use this document to define roles, responsibilities, structure, policies, and procedures in this document. Not every state requires LLCs to write an operating agreement, but without one, your LLC is subject to the rules as written by the state.
Some important questions you’ll want to consider for how your LLC operates: will your LLC be member-managed, or manager-managed? And, how will ownership be divided?
What is a member-managed LLC?
A member-managed LLC is an LLC managed by its members. The members themselves make day-to-day decisions about the business together. Where will you set up shop? Register your domain name? Open a bank account? In a member-managed LLC, the business owners make all of the decisions together. Most small LLCs that aren’t ready to hire employees are member-managed.
What is a manager-managed LLC?
In a manager-managed LLC, a hired manager does the work of running the business. Management can be made up of members, outside individuals, other LLCs, corporations, or all of the above—but usually, managers are hired employees who work for a salary, and they hold some decision-making in the LLC.
Member-managed LLCs are common among larger LLCs where it’s not practical for all the members to be involved in day-to-day decisions.
How is LLC ownership divided?
An LLC’s owners are called members. In most states, there’s no limit to how many members your LLC can have.
Ownership in an LLC is called “membership interest.”
Membership interest can be divided up however you’d like. This is one of the perks of starting an LLC. Typically, membership interest is divided among members based on their initial contributions—how much money they invested at the start of the LLC—and membership interest is directly correlated to voting power. Members with a higher percentage of membership interest usually hold more decision-making power.
For example, say an LLC has ten members, and they each contribute $1,000 to the LLC for a total of $10,000. Each member would hold 10% membership interest and have decision-making power accordingly.
However, this is just one way to set up membership interest and ownership. In your operating agreement, you can specify any arrangement you like. In addition to discussing how contributions and membership interest work, you should also consider working out how sale and transfer of ownership will function. This can extend the life of your LLC in states where they might otherwise be dissolved and reformed as a result of members leaving or joining.
How Our LLC Formation Service Works
Starting a business can be complicated, but you don’t have to go it alone. Registered Agents Inc can set up your LLC for just $100 plus state filing fees, and we’ll include a year of registered agent service with compliance filing. Here’s how:
1
Head to the Business Formation Sign Up Form
Our Business Formation Sign Up Form will take you through a series of questions required to start your LLC, including your company name, the state(s) in which you want to do business, and other information as required by your state(s). You’ll also have the option to add on additional business identity tools, like a custom domain, website, business email addresses, and a business phone line.
2
Create your secure account.
Your secure client account is your one-stop shop for managing your services, viewing any documents we receive on behalf of your business, and accessing our library of state-specific forms for all your business needs.
3
Pay our fee ($100) plus the state’s filing fees.
We’ll file your LLC formation documents and send you confirmation when it’s official.
Frequently Asked Questions
Can you have an LLC with just one member?
Yes! An LLC with just one member is called a single-member LLC or SMLLC. Single-member LLCs are very common.
How do owners pay themselves from an LLC?
If you have a single-member LLC, you’ll make something called an “owner’s draw.” This is basically just taking money from your business bank account. This can be done by writing a check to yourself, withdrawing cash, or just transferring the money from one bank to another. The key is to make sure that there’s a financial record of the money’s journey. For example, you shouldn’t take a payment from a customer and deposit it directly into your personal bank account. This could weaken your limited liability protections.
If you have a multi-member LLC, you can use owners draws or make distributions to members. Typically, an LLC will distribute money once yearly to members.
Why does my LLC need a bank account?
Your LLC’s liability protection is only as strong as the separation between you (the owner) and the business. So if you let your personal finances mingle with your business money, you’ll effectively erode that separation. There may be no immediate consequences to the erosion, but if you’re ever sued, a court could find that you and your LLC aren’t actually separate entities, leaving you liable for any judgments against your LLC.
There’s also the fact that a separate bank account will help you stay organized and aware of how much income your business is bringing in.
Does an LLC have to file a BOI Report?
Yes. Most LLCs are considered “reporting companies” under the Corporate Transparency Act and need to file a BOI Report with FinCEN. There are 23 exemptions, but most of these exemptions are for large companies that are already subject to a lot of regulatory oversight. Most LLCs do not fall into this category and are required to file a BOI Report. We can take care of this requirement for you for $25.
What happens if you start an LLC but don’t do anything with it?
It depends on your state. When you start an LLC, you’re required to file regular reports keeping the state up-to-date on your LLC’s contact information. If you fail to do this, the state may administratively dissolve your LLC for you, but they may not. If you let your LLC go dormant and then decide you’d like to use it later, you’ll probably have to pay penalties and fees for late annual reports to get your LLC back into good standing.